Monday 1, May 2023
Exorbitant privilege and all that
The Fed has created a lot of money. Of course, a lot of it has not translated into private sector spending, and so the impact on inflation has not been huge, but private sector lending has taken off again since the pandemic and has only started levelled off in the last year or so.
A lot of the world does not want to be tied to the dollar for pricing its exports (and imports). China is the obvious case, but Russia would much prefer that oil were not priced in dollars. The global south is increasingly looking to hedge its bets, and borrow from Japan and China, rather than western lenders, and in yuan rather than dollars. I am not sure it’s about not liking the dollar, it’s more about not wishing to be tied into a money transfer system that depends on the goodwill and supervision of the US authorities. I keep my money in several banks, not because I have a problem with any of them per se but because I know that for accidental and possibly intentional reasons sometimes I will find that I cannot make payments from one of them. OK, the Eurodollar system is largely offshore, but every so often a transfer between parties which will have to go through a US correspondent bank needs to be made.
At some point, surely, the USD is going to be hit. Of course, all other currencies have problems, and the USA has the great advantage of having an army which is currently by far the biggest in the world.
Many commentators are convinced that de-dollarization is coming, but I am not one of them. I think that world trade will continue to be conducted in dollars. However, I do not think this requires the dollar to remain strong forever. In many ways, the US voter would be a lot better off with a weak dollar, not least in that the factory jobs that have be exported to China might start to trickle back.
Brent Johnson’s Milkshake Theory has had a good run, but as the Fed gets ready to reduce rates, it’s days must be numbered!
I started thinking about de-dollarization when I read [this article] from ‘The Cradle’ — a publication focusing on ‘West Asia’ (or what I think of as ‘The Middle East’). There has been a recent resurgence of Google searches for ‘dedollarization’, but it has never been exactly popular. Of course, I guess the people who are really interested are based in Russia, Iran, North Korea and China, so wouldn’t be searching in English, nor using Google, so maybe this does not signify anything.
 https://ohzs-zgph.campaign-view.com/ua/viewinbrowser?od=3ze8ac8349b8beb143a5f739f8ab496be4c2724be5c8045c5660d4a03369175275&rd=1ea0ca8867456207&sd=1ea0ca8867454f1c&n=11699e4c1879fdd&mrd=1ea0ca8867454f0a&m=1 (The Cradle)